The Czech Republic and the Euro

The Czech Republic´s membership of the European Union involves, among others, the commitment to adopt the single European currency as soon as the required Maastricht criteria have been met. Therefore, in connection with the Czech Republic´s accession to the European Union, the question arises: when will the euro be accepted?

The answer to this question has been the drafting of a joint document of the Czech government and the Czech National Bank – Strategy of the Process of Accession of the Czech Republic to the Eurozone, adopted in 2003. The document described the economic situation of the Czech Republic in relation to the economic standard of the Eurozone. At the same time, considering the expected pros and cons resulting from the introduction of the single European currency, it outlined the potential strategy of introducing the euro in this country. The years 2009-2010 were mentioned as a potential target for the adoption of the euro, on the assumption that the process of real convergence of the Czech economy and the fulfilment of the required Maastricht criteria continue. In 2006, the Czech government decided to take several steps towards starting preparations for the Czech Republic to adopt the euro. The following are some of the important steps taken by the government in the process of preparations for accepting the euro.

An institutional structure was created for the introduction of the euro in the Czech Republic, an important feature of which is to get all the institutions concerned involved in the process. The supreme body is the inter-ministerial National Coordination Group for the Adoption of the Euro, comprising representatives of the ministries concerned and the Czech National Bank (CNB). The National Coordination Group is entrusted with the creation of working groups for making the necessary preparations in the different sectors for the adoption of the euro, to be led by the

National Coordinator appointed by the government.

An important decision which had to be made right at the beginning was the decision on how the euro would be introduced in the Czech Republic. EU legislation offered three potential scenarios of transition to the euro – using a transitional period, a one-off transition to the euro using the “gradual abolition phase”, or the one-off transition to the euro called “Big Bang”, which is a scenario where the euro is introduced in cashless and cash payment operations at the same time. Today, when the euro is already an internationally recognised currency, new Eurozone members without exception choose the Big Bang method. The examples of Slovenia, Cyprus, and Malta confirmed unequivocally that this was the cheapest and simplest option for the introduction of the euro.

CURRENT SITUATION

At the end of 2020, the Czech government adopted a joint recommendation of the Czech Ministry of Finance and the Czech National Bank not to set a target date for the adoption of the euro for the time being. The decision is based on information contained in the document “Evaluation of the fulfilment of the Maastricht convergence criteria and the degree of the economic harmony of the Czech Republic with the Eurozone”. The common document of the Ministry of Finance and CNB maps out the country´s economic preparedness for the adoption of the euro, which has been evaluated regularly since the Czech Republic joined the European Union in 2004. The document stated that, in 2020, under the unprecedented conditions caused by the COVID-19 pandemic, and the related worldwide economic decline, the Czech Republic is in a position probably to fulfil just one of the Maastricht convergence criteria, specifically the criterion concerning interest rates. The criteria concerning public finance and price stability will not be met. The last criterion, which evaluates participation in the exchange rate mechanism, cannot be formally met, because the Czech Republic

does not participate in it. As regards the level of preparedness of the Czech Republic for accepting the euro, weak spots persist. An obstacle to joining the Currency Union, according to the government, is the unfinished process of real economic convergence of the Czech economy, where in most key indicators, in particular the price and wage levels,

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the lag remains considerable. Another disparity rests on the structure of the Czech economy in comparison with that of the Eurozone, which would complicate the performance of the single currency policy. And, in view of the aging of the population, the problem of the longterm sustainability of public finance, which, after the adoption of the euro, should partly offset the loss of the autonomous currency policy, has not as yet been solved. On the other hand, the high degree of the openness of the Czech economy and its great business and ownership interconnection with the Eurozone speak in favour of adopting the euro. Other positive factors are the rel-

Macroeconomic Prediction of the Czech Republic In April 2021, the Ministry of Finance published an important document, the Macroeconomic Prediction of the Czech Republic, drafted on the basis of the plan of non-legislative documents for the 1st half of 2021. The Czech economy has been fundamentally affected by a new type of coronavirus pandemic.The measures adopted to prevent the spreading of the infection have caused a profound fall in the economy, amounting to 5.6 % for the whole of 2020. The decline has affected all spheres of domestic consumption, with the exception of public spending. The Ministry of Finance expects that the vaccination of the population now in progress will improve the epidemic situation, which will support economic revival not only in the Czech Republic, but also in other countries. The growth of GDP in 2021, pushed by the creation of gross fixed capital, inventory recovery and general government consumption, could reach 3.1 %. The economic revival in other countries, too, is expected to help to improve the Czech balance of trade. While household consumption in 2021 is likely to be stagnant, its revival in 2022 is expected to accelerate economic growth to 3.7 %. Since the 4th quarter of 2020, the year-on-year growth of consumer prices has been visibly slowing down and has returned below the upper three-per cent tolerance band of the CNB inflation target. The fall in consumer demand has an anti-inflationary effect, while frictions on the supply side of the economy work in the opposite direction. For the year 2021, we expect the average inflation rate to be at the 2.5 % level, where the higher prognosis is supported mainly by higher crude and food prices. In 2022, in the absence of major anti-inflationary factors – with the exception of household consumption revival – the inflation rate could slow down to 2.3 %. The development in the labour market is largely influenced by fiscal stimulation measures. Despite moderate growth, the unemployment rate is standing at a substantially lower level than the current cyclic position of the Czech economy would suggest. In consequence of the delayed effects of the economic decline, the unemployment rate in 2021 is likely to rise to 3.6 % according to the latest sample labour force survey. In 2022, it might rise slightly, to 3.7 %, in a situation at the end of this year, where the economic revival and the expected suspension of measures keeping the employment rate high will be working against each other. The public finance deficit in 2020 amounting to 6.2 % of GDP was largely influenced by the coronavirus pandemic. The slowing down of economic activities was accompanied by a decline in income and an increase in expenses, provoked by measures taken to contain the epidemic and mitigate its social and economic consequences. The continuing epidemic will also be reflected in this year´s balance sheet, expected to be down by 2.6 p. p. Public debt is expected to grow from 38.1 % of GDP in 2020 to 44.8 % of GDP at the end of 2021. In 2022, however, the effects of the epidemic are likely to be minimal. With continuing consolidation, the deficit next year is estimated to be below 6 % of GDP and the debt above 48 % of GDP. The prediction is burdened by a number of risks, which in sum are strongly pointing downwards. The main negative factor is the development of the epidemic situation and the process of vaccination. Despite the agreement between the European Union and the United Kingdom on the future arrangement of mutual relations, uncertainties in the area of international trade can still be felt. Internal risks include uncertain developments in the automotive industry, the reaction of the labour market to potential structural changes in the economy, overvaluation of residential property prices and the potential growth of non-performing loans.

Credit Rating Agencies Confirm Excellent Rating Position of the Czech Republic The evaluations of the Fitch and ACRA Europe rating agencies confirm the high credit reliability of the Czech Republic, which, despite the economic development caused by the coronavirus pandemic, will retain its financial position on both the domestic and foreign markets. In 2021, Fitch Ratings confirmed its rating of the Czech Republic for long-term liabilities in the domestic and foreign currencies at AA- level. The agency especially appreciates its stable fiscal and monetary policy, a strong institutional base, and the good position of Czech public finance as regards the debt ratio. The assessment outlook is stable. ACRA Europe, after the closure of the markets, also confirmed the country´s excellent rating at AA level, for its long-term liabilities in both the domestic and foreign currencies. According to the agency, the Czech economy entered the pandemic period in good shape, thanks to its low unemployment level, low public debt, high foreign exchange reserves and a stable banking system.

atively stable exchange rate of the Czech crown in relation to the euro, even during this year´s deep economic downfall, the restored harmony between the financial markets of the Czech Republic and the Eurozone and the solid banking sector in the Czech Republic. Over the past few years, the form of the institutions and the rules of the Eurozone have changed and talks on tightening European integration are continuing. Therefore the future potential financial and non-financial commitments of the Czech Republic linked with the country´s entry into the Eurozone are difficult to be reliably estimated.